Becoming increasingly important with profits from

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becoming increasingly important, with profits from issuing new paper currency upwards of €50 billion annually.Some smaller nations have chosen to voluntarily set exchange rates against the dollar while other countries haveselected the euro. Usually a country makes the decision between the dollar and the euro by reviewing theirlargest trading partners. By choosing the euro or the dollar, countries seek currency stability and a reduction ininflation, among other various perceived benefits. Many countries in Latin America once dollarized to providecurrency stability for their economy. Today, this is changing, as individual economies have strengthened andcountries are now seeking to dedollarize.Spotlight on Dollarizing and Dedollarizing in Latin AmericaSpotlight on Dollarizing and Dedollarizing in Latin AmericaMany countries in Latin America have endured years of political and economic instability, which has exacerbatedthe massive inequality that has characterized the societies in modern times. Most of the wealth is in the hands ofthe white elite, who live sophisticated lives in the large cities, eating in fancy restaurants and flying off to Miami forshopping trips. Indeed, major cities often look much like any other modern, industrialized cities, complete withcinemas, fast-food restaurants, Internet cafés, and shopping malls.But while the rich enjoy an enviable lifestyle, the vast majority of the continent’s large indigenous population oftenlives in extreme poverty. While international aid programs attempt to alleviate the poverty, a lot depends on thecountry’s government. Corrupt governments slow down the pace of progress.Over the past two decades, governments in Ecuador and Peru—as well as others in Latin America includingBolivia, Paraguay, Panama, El Salvador, and Uruguay—have opted to dollarize to stabilize their countries’economies. Each country replaced its national currency with the US dollar. Each country has struggledeconomically despite abundant natural resources. Economic cycles in key industries, such as oil andcommodities, contributed to high inflation. While the move to dollarize was not always popular domesticallyinitially, its success has been clearly evident. In both Ecuador and Peru, dollarizing has provided a much neededbenefit, although one country expects to continue aligning with the US dollar and the other hopes to move awayfrom it.In Ecuador, for example, a decade after dollarizing, one cannot dismiss the survival of dollarization ascoincidence. Dollarization has provided Ecuador with the longest period of a stable, fully convertible currency in acentury. Its foremost result has been that inflation has dropped to single digits and remained there for the firsttime since 1972. The stability that dollarization has provided has also helped the economy grow an average of 4.3percent a year in real terms, fostering a drop in the poverty rate from 56 percent of the population in 1999 to 35percent in 2008. As a result, dollarization has been popular, with polls showing that more than three-quarters ofEcuadorians approve of it.

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Term
Spring
Professor
Eric Helland

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